3 Reasons Big Banks Have Returned to Small Business Lending

In February, small business loan approval rates at big banks ($10 billion+ in assets) jumped to 19.1%, according to the Biz2Credit Small Business Lending Index, my company’s monthly analysis of applications for funding.

This represents a jump of 7% above January, and 20% in a year-to-year comparison of lending approval rates at big banks. There are three main of reasons for this sea change.

1: Higher Quality Applicants

Slowly but surely the economy is growing. Big banks have been sticklers for having three years’ worth of financial data when loan applications are made. Thus, small business owners can provide data from 2011-13, a period that was much more robust than in 2009 and 2010, when the country was still reeling from the Lehman Brothers collapse and the ensuing chaos in the financial sector. The average credit scores for small businesses rose significantly in 2013. While the lending parameters of big banks are still stricter than for other institutions, they are indeed loosening the purse strings and are processing increasing numbers of SBA and non-SBA loans.

Solid businesses were wary about borrowing while the economy appeared shaky. However, because confidence has risen and small company financials have improved, entrepreneurs are willing to take on debt. The whole chicken-and-egg situation (banks said there were not enough high quality borrowers, while small business owners were frustrated that banks wouldn’t lend) is ceasing to be an issue. Now there is more optimism in the economy. Many companies are planning their orders for Christmas of 2014 and are applying for credit now in order to pay for the inventory. This is encouraging news.

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2: Competition in the Marketplace

When traditional lending slowed down during the “credit crunch,” alternative lenders filled the void. They did what the banks would not do, namely make swift decisions and provide capital to startups and companies whose business credit scores hovered near 600. Thus, while the banks hunkered down, credit unions, cash advance companies, microlenders and others were willing to lend. As the economy has recovered, the big banks, which still have the advantage of owning recognizable brand names, continue to attract applications. Word spread in the marketplace that banks are lending. While they may not approve funding requests as quickly as tech savvy alternative lenders do, the banks offer much lower interest rates. I have seen companies take bank loans, pay off their cash advances and other obligations and lower their cost of capital significantly.

The two categories of lenders who have been most hurt by the surge in big bank lending are the high interest alternative lenders and credit unions, which remain handcuffed by the governments member business lending (MBL) cap and by their own inability to keep up with technological advances. Entrepreneurs have become accustomed to applying for credit online, which streamlines the process. Many credit unions have not upgraded to allow online applications.

3: Stagnation in Mortgage Lending

While the real estate market continues to rebound, mortgage lending is not the hotbed of activity that is was during the housing boom. We may never again see the levels of the early 2000s again. In 2013, there was a little bit of a revival in home-flipping as investors bought distressed properties and sold them for tidy profits. But because banks were burned so badly when the housing bubble burst, they are still very stringent in approving mortgages.

Further, banks rediscovered the fact that small business lending is quite profitable. Banks have to make loans in order to make money. Thus, the resurgence in small business lending continues. This is a good sign for entrepreneurs looking to expand their businesses.

Rohit Arora is co-founder and CEO of Biz2Credit, an online resource that connects 1.6 million small business owners with 1,200+ lenders, credit rating agencies and service providers such as CPAs and attorneys via its Internet platform. Since 2007, Biz2Credit has secured more than $1 billion in funding for small businesses across the U.S. Follow Rohit on Twitter @biz2credit.